South Wales Chamber Quarterly Economic Survey

2009 Q4:Implications for the Welsh Economy

Professor Brian MorganUWIC

South Wales Chamber Miskin Manor

Tuesday12th January 2010

2009 Q4 2009 Q3

increase decrease increase decrease

sales 30 28 33 36

orders 23 26 26 33

worforce nxt Q 32 11 25 13

cash flow 36 40 24 44

prices 23 20 28 18

investment 24 16 19 18

optimisim sales 75 23 66 24

optimisim profits 64 27 58 28

S W Chamber Survey: Summary

No real Trends

• No clear pattern is emerging• Sales and orders (particularly orders) have worsened

slightly since last quarter • Also price expectations have decreased• Employment expectations have improved slightly but

expectations for cash flow are ambivalent• One aspect of the survey that has improved is

investment intentions and Business optimism :• 75% are expecting improved sales in 2010 and 64%

improved profits

Cautious Optimism

• Separate surveys by Grant Thornton and Deloitte – published yesterday – support this trend

• But, most quarterly changes are within the ‘standard of error’ of samples of this size

• Also the comparisons are with some of the worst quarters on record

• Other surveys claim that many businesses still worried about a double dip recession

• So we have to go back to the underlying economic data to see what is happening

Source: FT

We don’t have reliable quarterly data for Wales

WALES

Wales GVA per head

74%

Relative GVA : UK = 100 1999 -2007

After 10 years of decline Unemployment has doubled In two years to over 80K

Welsh Unemployment

Unemployment Rates Aug 2008 to Aug 2009

• Year Wales England Scotland N. Ireland

• 2009 9.1% 7.9% 7.1% 7.1%

• 2008 5.9% 5.9% 4.7% 4.3%

• The Welsh economy is suffering more than other regions• Unemployment expected to keep on rising during 2010• Youth unemployment is set to rise above 25%

– the under 25s are bearing the brunt of this recession

Other problems – (i) Bankruptcies

• A record number of people in England and Wales were declared insolvent to the end of Oct 2009.

• For 2009 as a whole insolvencies will top 130,000 – exceeding the previous high of 107K in 2006

• This is a 30% per cent rise on the same period a year ago, and is the highest since the series began in 1960.

• Cause - Rising unemployment coinciding with high levels of debt.

• Bankruptcies look set to go on rising into 2010 – reaching over 150,000 and could continue well into 2011

(ii) Continuing credit squeeze on SMEs

• Future investment decisions by SMEs are being curtailed by a lack of credit availability

• Also credit conditions and lending processes are more opaque than ever – increasingly being decided at Head Office – to the disadvantage of Welsh SMEs

• Typical complaint : “The company has a proven track record, we are profitable and don’t have high debt ratios

• But the banks still insist on higher collateral and reduced credit limits – they are just sitting on the money made available by the Bank of England’s policy of QE ........

The UK and Welsh economies: prospects for 2010

• In addition to debt and credit squeeze, we also have fiscal mismanagement on a grand scale,

• the UK has a huge structural budget deficit - £178 bn. • This will add to the serious economic and financial

obstacles facing Welsh companies in 2010 – • and explains why consumer and business confidence

remains fragile. • A precarious recovery could begin in late 2010

generated by lower interest rates, the lower pound and low wage settlements

• This will keep UK unemployment below 3 million

Which sectors will emerge from first?

• Despite improvements in the Purchasing Supply Index neither the manufacturing sector nor the service sector are likely to boom in 2010 - 2011.

• Similarly the construction sector will be held back in 2010 by high vacancy rates in commercial and residential property. Fragile growth is in prospect for 2011.

• The most likely growth sectors will be:(i) the high tech sector – driven by Apple’s Apps and Google’s

innovations in the mobile internet sector – and

(ii) those manufacturing and service sectors able to take early advantage of the transition to the low carbon economy.

Where should companies invest?

• the ‘low carbon economy’ will be the theme of the next decade - particularly if we develop the massive tidal power resources of the Severn Estuary

• so firms should invest in anything that improves the company’s ability to access these opportunities

• these investments will pay dividends in 2011 – 2015 and beyond.

• But companies currently heavily dependent on the public sector should invest in diversification

• because they are going to be the big losers in 2011 – 2015.

What should UK Gov and WAG do?

• Tough choices need to be made in 2010-12, whichever party is in power.

• The main choice will be how to reduce the huge budget deficit in ways that do not undermine the recovery.

• But the most important choice will be about the size of the public sector over the longer term.

• In 1997, UK government spending was 38% of GDP. • It is now approaching 50%. This is simply unsustainable• In Wales the share of government spending in GDP is

approaching 60% - which is even more unsustainable

Clear Red Water

• WAG’s ‘clear red water’ policy has been nothing short of disastrous.

• Compared with England, - it has done nothing to generate either economic prosperity or solve our social problems

• Expensive publicity stunts like free car parking and free prescriptions have diverted attention from the underlying problem :

• the continuing decline in Welsh relative prosperity levels – now down to 74% of the UK average.

It’s the Economy Stupid

• Improving economic prosperity is the surest way to address our social problems.

• However, instead of appreciating this, we have created - both in the UK and particularly in Wales - a new industry of ‘social problem solvers’

• supported by an army of bureaucrats. • This is not the best way to address our economic and

social challenges• The new leader of WAG should state categorically that

his overarching goal will be to focus on economic development

Prosperity holds the key

• WAG’s objective should be to raise our prosperity levels relative to the UK average.

• Every policy initiative emanating from WAG should focus on this goal.

• Raising economic prosperity levels in Wales will not solve all our problems ....

• But providing a better health service and reducing social deprivation will be much easier to achieve on the back of a competitive economy.

WAG’s Role

• This inevitably means increasing the size of the private sector

• it requires WAG to trumpet and encourage the contribution of private sector companies to all areas of economic and social policy

• not excluding it from certain ‘cherished areas’.

• Indeed, increased utilisation of private sector services is the best way to ensure that devolution eventually delivers an economic dividend

• Only then will the tentative green shoots of optimism flagged up in this Survey bear fruit for businesses in Wales